DMG Blockchain Solutions Inc. (DMGI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the DMG Blockchain Solutions Q1 2023 Update Conference Call. [Operator Instructions] Participants on this call are being advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately 1 hour after the end of the call. And now I'd like to turn the conference over to Jules Abraham of Core IR, the company's Investor Relations firm. Please go ahead, sir.

Thank you, Keith, and good afternoon, everyone. Thank you for joining us for the DMG Blockchain Solutions shareholder update conference call. Joining us today from DMG Blockchain Solutions are Sheldon Bennett, the company's Chief Executive Officer; and Steven Eliscu, Chief Operating Officer. During this call, management will be making forward-looking statements, including statements that address DMG Blockchain Solutions expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in DMG Blockchain Solutions most recently filed periodic reports and the company's recent press releases, particularly the cautionary statements within. The content of this call contains time-sensitive information that's accurate only as of today, March 2, 2023. Except as required by law, DMG Blockchain Solutions disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It's now my pleasure to turn the call over to Sheldon and Steven. Gentlemen?

Thank you, Jules, and thank you to everyone who's joined the call today. I'm Sheldon Bennett, the CEO of DMG Blockchain Solutions. First, I would like to highlight on software. Terra Pool is again live and operating after its upgrades. Second, Petra is complete and operating on Terra Pool with an unexpected focus on ordinals, which I'll get into shortly. Third, on mining, DMG grew its hash rate to just over 0.9 of an exahash, a level we are at today until we receive more miners from Bitmain. Now to review Q1 2023, which ended December 31, 2022. As we have restarted Terra Pool, this has given us the opportunity and the ability to deploy our Petra technology, for which we are using to place ordinals on the Bitcoin blockchain. Petra ensures those NFT creators who want to utilize the most immutable digital asset ledger can do so in a carbon-neutral manner. This is a huge step forward for the industry as NFT creators have a new opportunity they didn't have previously for transacting their digital assets. These creations, whether they be art or music, stay recorded on the Bitcoin blockchain for all time as miners are the guardians that ensure blockchain immutability. For DMG, NFTs can also become a recurring revenue opportunity as each time the NFT is to be transferred in a carbon-neutral manner, the associated transaction fees make it to DMG and other Terra Pool members. While we recognize that [ by ] transaction fees on the Bitcoin blockchain for placing NFTs may be very much short-lived, we are, at the same time, encouraged that transaction fees are demonstrating that they may become a much more substantial portion of our overall miner reward, which is what we believe Satoshi envisioned back in 2008. Petra technology is just another piece of the Core+ Bitcoin transaction monetization opportunity. And we are pleased to have been able to intersect this opportunity at just the right time. We continue to look forward to furthering our Core+ strategy. As a reminder, our key objectives for the Core+ are: one, to grow our Terra Pool hash rate with the long-term goal of achieving 10% of the network share; two, actively transact Bitcoin in a carbon-neutral manner through Terra Pool using our Petra technology; and three, to create a carbon-neutral Bitcoin marketplace. In the near term, ordinals have risen as a short-term catalyst for Petra, and we're excited about its potential even after the hype dies down. We believe this helps validate that our strategy to monetize Bitcoin transactions is the right one. And given our foundation of our hash rate, Terra Pool and now, Petra, we have the ability to guide the market in this direction. We believe achieving these goals will enable us to grow our Core+ revenue to be significantly larger in the long term. So for DMG's Core strategy, we have a few updates on our mining infrastructure. We remain at 0.91x exahash as we speak as we still haven't yet received our final 42 petahashes of S19 XPs from Bitmain. We plan to purchase additional miners from Bitmain using our accumulated credits, and we are working with them to decide which is the best miner we can receive with a reasonable lead time. To accommodate space for new miners, as our long-term goal is to grow to 2 exahash, we are planning to add container capacity on our Christina Lake property outside between our building and substations. We are working to minimize the cost of the containers and expect the capital of the equipment and install labor to be modest. Regarding immersion cooling from which we expect to achieve up to 40% hash rate increase, [ stocks ] on specific equipment we will use is still in the planning stage. We'll provide an update when we're closer to deploying our large-scale pilot tanks in Christina Lake. Even as we are focused on developing our Core+ strategy, we remain committed to growing our hash rate faster than network in the most capital efficient way possible. Now I'll hand it over to Steven to go over the company's performance.

Thank you, Sheldon. I'm Steven Eliscu, DMG's COO. Now a few words about the company's overall position. The company continues to manage its cash closely with spending focused on our Core+ and immersion cooling initiatives while making incremental improvements to our mining operations. As Sheldon highlighted above, we plan to make some modest capital additions to our [indiscernible] property to be able to quickly expand. Note that as we are planning to purchase containers cost effectively and some of the infrastructure we need for expansion is already owned by DMG, the actual cash [ lay out ] for such an expansion is well below what we would -- what would be expected for effectively doubling our mining capacity. From a Core+ perspective, we are continuing developments that are bolstering our capabilities. Under the hood, we've upgraded our Terra Pool software, which includes making our infrastructure more scalable at lower cost and ultimately giving us more control over how we manage our pool and how we can inject Petra transactions into Terra Pool from a variety of sources. Our goal is to maximize revenue for DMG and pool members making green pool attractive, not just because it's carbon neutral, but also because it's more profitable. Our balance sheet remains sound despite challenging market conditions, with a modest $1 million of debt added in the December quarter. While we continue to search for low-cost sources of debt to accelerate our immersion cooling plans, we are focused on maximizing cash flow. In our December quarter, our revenue increased 10% sequentially to $7.2 million from $6.5 million in the prior quarter, mainly as revenue from self-mining increased 22% to $6.7 million from $5.5 million on a 38% increase in mined coins to 274.7 offset -- partly offset by an 11% decline in the average price of Bitcoin from recognized revenue to CAD 24,286. Our margin on our revenue less operating and maintenance costs was 39% in the December quarter, down from 47% in the prior quarter. As a proxy for cash flow from our business, our earnings before other items, excluding depreciation, amortization and share-based comp was $1.3 million or 18% on a percentage basis in the December quarter, down from $1.8 million and 28% prior quarter. Other -- our earnings before other items was minus $5.3 million in the December quarter versus minus $4.7 million in the prior quarter. Expenses, excluding depreciation, amortization and share-based comp, increased to $1.4 million from $1.3 million as non-mining cash expenses remain relatively steady. Depreciation increased 2% to $6.1 million. Future changes in depreciation will depend on the rate of capital equipment additions. Our cash plus digital currency holdings increased 4% to $10.9 million from $10.6 million in the prior quarter as the amount of Bitcoin held increased 32% to 453, which was partly offset by a 16% decline in the price used to value our Bitcoin held. Additionally, our property and equipment and long-term deposits decreased to $66.9 million from $72.6 million in the prior quarter as our depreciation exceeded the amount of new equipment deployed. Our total asset base accordingly decreased to $92.1 million from $96.9 million in the prior quarter. In the December quarter, DMG mined nearly 275 Bitcoin, a 38% increase sequentially from 200 as a realized hash rate of 0.84 exahash was up 50% from our September quarter, which was partly offset by an 18% decrease in the network BTCs for exahash. In the December quarter, DMG sold nearly 160 Bitcoin at an average price of CAD 25,216 generating $4.1 million of cash. Thus, DMG sold 60% of the Bitcoin amount mined in the December quarter versus the prior quarter of selling 134% of the Bitcoin amount mined. Our hosting revenue declined 22% sequentially in the December quarter to $0.5 million. We expect hosting revenue to remain in the near Q1 levels, at least for the near term. As discussed on our Q4 earnings call, we announced raising $1 million of debt secured by one of our fully paid real estate holdings. We continue to evaluate capital raising opportunities and seek to avoid shareholder dilution. As we spoke to you a month ago about our longer-term goals for Core and Core+, we simply want to reiterate that we remain committed to these goals of expanding our fleet and converting to immersion cooling on our Core strategy, and we look to Core+ as our longer-term driver of valuation. Sheldon clearly articulated our focus is on monetizing Bitcoin transactions. I will now hand the call back to Sheldon to summarize our prepared comments, and we'll answer questions submitted to us prior to the call.

Thank you, Steven. So just to reiterate a few key points. As Steven opened, the company is highly focused on tight cash management. Two, DMG mined 275 Bitcoins in Q1. That's up 38% from the prior quarter, which is a new record for us. Three, of the 1 exahash of the miners ordered, almost all have been delivered. We only have 1 shipment we're waiting on. Four, additionally, as a proxy for cash flow from our business, our earnings before other items, excluding depreciation and amortization and share-based compensation, was $1.3 million or 18%. While this is down, the improved Bitcoin price is also part of marginal -- margin increase. Cash and [ BCC ] on hand at the end of the quarter was $10.9 million, with total assets of $92.1 million. While all those metrics are positive, I want to close my prepared comments by reiterating how excited we are to be moving to the next steps of our Core+ strategy with the execution of Petra transactions on the Bitcoin main net. Petra is a key enabling technology for carbon-neutral ordinals, which is a new addition to DMG's overall monetization opportunities. Now on to our Q&A. We have a few questions posed to us that we encourage questions to be sent to us any time throughout the quarter or throughout the year. Just e-mail them to [email protected].

So question number one, and I'll take them on. Steven can jump in as he likes. Maybe I'll defer a couple to Steven. He might be a bit better to answer them. Question one, there seems to be somewhat of a backlash against ESG initiatives, especially where financial institution's charters are now being challenged. Does this negatively impact your strategy? So good question. We've been seeing news reports about this. But in general, we don't believe that this impacts our strategy at all. DMG is focused on what is right for our business, and specifically, initiatives that are ultimately going to be demanded by regulators. So decarbonization, keeping back -- bad actors out of the mainstream crypto economy is very important for us. And we see that this is not going to change, and this is part of our ESG initiative. We believe these are secular trends that will ultimately drive our business and focusing where we can get the most revenue at high margins, such as embracing the option ordinals and keeping them carbon neutral is a great example of that. Steven, do you have any additional comments?

Yes. I would just say that even as there's a lot of general talk, specifically what DMG is focused on, the issues of taking -- reducing carbon in the Bitcoin ecosystem and being able to ensure that bad activities such as money laundering, human trafficking aren't being facilitated using Bitcoin that we can play a positive part in enabling that. And that is just -- continues to play to what DMG is focused on.

Thank you. Another question. Foundry USA Pool network share keeps growing. How can you possibly compete with Terra Pool against such a behemoth? That's a great question. Generally, my thoughts on that is being the biggest isn't necessarily being the best, especially in the world of crypto which is a world of decentralization. And so a large player leads to fears of centralization. Foundry has thrived because it's North American based, and it has built a good platform. But ultimately, pools have a low switching costs. And given the potential, we believe, for miners to earn more money on Terra Pool than potential other pools out there, we believe that we can grow Terra Pool and compete with Foundry Pool.

Yes. And I would just add that we're not just building a pool. In growing a pool, we're also building an ecosystem and building an ecosystem around clean blockmining and being able to take the carbon out of Bitcoin transactions. That's something where we're going to stay very focused on. We think we have something that's unique, and we're going to grow that as our objective.

And there's a similar question. I think it's kind of an add-on question to the Foundry question which is, why has it been so difficult to get more large miners on Terra Pool? I think that's just a function of building a pool software from scratch and getting to work properly and to scale with our helm and our Petra and our clean blockmining. So we did go through a few months of serious software upgrades, which took longer than expected. So we've lost a bit of momentum from when we initially told the market about our partnership with Argo in developing Terra Pool. We do clearly aim to get that momentum back as we believe we have a compelling value proposition in Terra Pool. It will take a bit of time. But as we're operating careful now and as we're applying our Petra technology to blocks for mining, we now believe we have the foundation to build and attract more green mining miners out there, carbon-neutral miners out there onto the Terra Pool platform. The next question...

Yes, I was going to take the next question, Sheldon. Just talking about...

Sure.

We have a question here about that we, first, we were talking about green and Bitcoin funds, then we switched to talking about a green Bitcoin marketplace. And just having a more definitive time frame as to when we could put all of this together. And we -- to answer this, we've had a lot of interest since creating Terra Pool about being able to sell green-mined Bitcoin. And with the Petra technology, enabling Bitcoin to stay green by continuing to move it through Terra Pool, the logistics would be straightforward. Well, we've learned subsequently that, that's not necessarily the case, especially as what we really want to do is create a mechanism to have a market clearing price such that we can talk about the premium for green-mined Bitcoin as 5% or 7% or whatever the market would determine. And so that ended up where that was -- we would need to supply a significant amount of Bitcoin as much as we have on our balance sheet, probably would need a significant amount more to really establish a green Bitcoin fund. So what we thought instead is we can establish a marketplace, and this would allow us to build more incrementally and utilize the Bosonic network where the green Bitcoin can be identified and sold, specifically having that Bitcoin routed through our pool. What we've learned there in terms of moving that strategy forward is we need to build a complete ecosystem of miners, custodians, exchanges, financial institutions that could all work with utilizing the Petra technology and Terra Pool. And so this is a large task. It's not going to happen overnight. We're still committed to this path because we think it's the right thing to do. And ultimately, we do believe that Bitcoin [ graded ] in a carbon-neutral manner has the potential for a price premium. At least in the near term, we're going to focus on utilizing Petra, such that Bitcoin that's already created can be moved through Terra Pool in a carbon-neutral manner. Even if carbon was attached to it in prior creation and movements, at least on a go-forward basis, that Bitcoin can now be moved without carbon. We think there is demand for this, and this is going to be part of our focus in the nearer term.

Thanks, Steven. That's a great answer and a long answer. And it does show a couple of things. One, it is difficult to build an ecosystem in a short period of time, but it's possible as we have completed some of the parts with the pool in Petra and working with Bosonic. And so we're going to keep pushing forward on that. And we're hoping to have more news out as the months go by. The next question, what is your cost to mine Bitcoin. This is a common question I get. We might just make it a standing question. So as we've said last quarter, it's essentially the same for this quarter, it's around USD 10,000 per [ coin ] is our cost to mine a Bitcoin. The change of that cost is largely a function of network difficulty which hasn't really changed a lot or significantly. I mean, changes every 2 weeks, but not significantly to change that overall cost. But we do expect this quarter that difficulty and that cost of a coin to start to increase from the last 2 quarters. Can you give an update on your corporate development activities? This is quite a general question. And so generally, anything that we're doing is related to either adding cryptomining capacity, cryptominers, or accelerating our software and all of our projects in Core+. So my general answer to a general question would be, we're still doing all of that. It takes a bit of time when we look at potential partnerships and kind of M&A that may happen. There's not as much M&A happening as I thought. Well, I don't think there will be a lot, but as others may have thought there would be, it was nice to see the [indiscernible] M&A project. It seems to be going ahead. And obviously, we're always interested in different opportunities, but would not disclose anything until that opportunity was material enough for our shareholders to know about. I don't know if Steven has a comment as well.

What I would say is we haven't slowed down in terms of always looking for ways to increase the value of the company that go beyond our internal operations. And we're certainly examining, always examining potential opportunities. So there's no slowdown in terms of this.

Yes. I think that's good for the next question that we have on the list here. Can you give an update on DMG's expansion to new, assuming low-cost electricity sites? And so we never really stopped looking for low-cost sites. One goal is to fully reach the capacity Christina Lake, which we had said earlier, we are on our way to do that and fully build the infrastructure there. And we think we can do that at a low cost. We do look for other sites. It's always hard to find a site that is meeting all the needs that we want. Low cost being [ boring ], but all the other infrastructure questions are very important as well. We don't have a super sense of urgency that gets something done right away as we are finishing out Christina Lake. But that being said, we are looking at places in the U.S. and Canada that we could potentially partner with or purchase ourselves to expand beyond what can Christina Lake do. We do understand that have been coming and have been coming every 4 years after that. And low cost is paramount to what we're looking at. We haven't been looking outside of North America, to be honest. We're not really looking at some of these far-off jurisdictions that others may be looking at. That could change over time. But right now, we're more focused on areas where we really understand the rule of law and the protection of our assets, and we feel comfortable that we're doing the right thing with our investors and trust that we'll make decisions that won't impact the value of DMG. Steven?

The other -- yes, the other comment I would add to what Sheldon said is as we shift to immersion in terms of the overall cost structure for mining, it shifts more -- it shifts the business from being more capital intensive to being more operationally intensive. And that operational intensity is going to require us to be more focused on finding new low-cost electricity sites. So this isn't something we're doing because it would be nice to have lower cost electricity combined with the [ havening ] and what we think is an industry move to immersion cooling, this is going to be a requirement in the long term.

Thanks, Steven. Do you want to take the next question? Or do you want me to take a stab at this one?

I think you're the regulatory expert.

Canadian regulatory is easier than U.S., but okay. The question is, do you see any regulatory changes with either Canadian or U.S. governments that could affect your business? So it's a great question. Our business right now is more Canada-centric, but we are very aware that what the U.S. government has, or does, will do, have done, has a direct impact on what's happening in cryptocurrencies and Bitcoin in particular. So our feeling and our belief is that DMG, long term, will be a net beneficiary of any kind of increased focus on regulation or ESG by governments or institutions that see this to be important. The whole stack of our Core+ is focused on regulatory issues. That was the reason we started building this out as a public company, was to meet regulatory issues that we saw coming as best we could with our software stack for Bitcoin. As Bitcoin is here to stay, we believe governments will want Bitcoin miners to have the lowest impact on environment. We think everybody wants that, whether we're Bitcoin or not, but there seems to be a lot of interest in Bitcoin miners' power use and low impact on environment. And we see the trading of Bitcoin to be the same way where governments and finance institutions would like to see Bitcoin minimizing bad actors being involved and protecting consumers, especially consumers that have been impacted by exchange bankruptcies, but not just exchanges. There have been other bankruptcies in the ecosystem that is hard on consumers. Do you want to say something, Steven?

Yes. I would just -- with regards to the U.S., certainly, the environment has become more hostile post FTX. If you look at stable -- [ subtly ] some stable coins being considered securities that is concerning as well as proposal of the digital assets Anti-Money Laundering Act and miners being considered money services businesses. We're going to watch very closely for regulatory developments throughout North America. Just -- we think long term that as long as these more fringe activities don't negatively impact Bitcoin, the overall environment will play to our advantage, but the uncertainties remain.

Yes. Just to add to that, DMG's Terra Pool, our clean blockmining bio, using the Walletscore technology, Petra and its ability to give optionality transactions, these all help to address the issues and enable financial institutions or broadly any one in the Bitcoin ecosystem to conform, I would say, better or comply better with both [ BSD ] requirements and regulatory requirements. So that's our general feeling. I think in Canada, there is a working group around some of the issues that are happening with the federal government, probably doesn't have as much media on it as things that happen in the U.S., but we are kind of disagreeing with the federal government and how it would be -- or at least potentially asking pool operators and miners questions around KYC on every miner transaction that would happen in the block. So these are things that we're working on as a group as well as questions around ITCs that are recoupable or not if you're a crypto miner. The results of these discussions aren't over yet. It's ongoing, but we're hoping that, at least in Canada, the mining industry will make its point understood and be treated fairly just like any other business in Canada when it comes to ITCs. And our last question, I think this is almost a standing question up there with what is the cost to make a Bitcoin is what are your top objectives for 2023? And so it hasn't really changed from our Q4 earnings call. One is continuing to focus on our cash management. Two is to grow beyond our 1 exahash. We really like the 2 exahash, and we'd really like to do this with some immersion cooling to lower our CapEx cost to reach that. Three is to increase our software revenue. With Terra Pool back up and running and Terra Pool running -- or sorry, with Petra running on Terra Pool, bringing in new revenues. So we're really focusing on increasing our software revenue. And then for, which is a bit more -- I'm not sure what word to use, but it's a little longer goal and maybe even more difficult as we've learned over the last few quarters is to establish a marketplace for carbon-neutral Bitcoins both sort of buying, selling and moving them. So those are our top objectives for 2023. I think we're well on our way. And that ends the questions on this call, and I thank everyone for attending, and our call is now over.